It's a long time since a major European bank had to grapple with the problem of surplus capital. But that is the position that HSBC will soon be in.

Despite a $1.9bn fine from the US government for money laundering and a $2.3bn bill to compensate UK customers, the UK-based banking giant was still able to pay $8.3bn in dividends in 2012 and report a sharply improved core Tier 1 capital ratio on a fully loaded Basel III basis of 9%. This is expected to rise to 10.3% in 2013, close to the top of its target.

"HSBC" and "surplus capital" are words that haven't always gone well together: The bank spent much of the last five years writing off a decade of earlier malinvestment. Chief executive Stuart Gulliver insists that this time HSBC will eschew acquisitions in favor of organic growth. But investors may be skeptical given that the bank fell well short of its targets in 2012. The cost-income ratio actually rose in 2012 to 62.8% compared with a target of 48% to 52%, while the return on equity fell to 8.4% compared with a target of 12% to 15%.

True, these missed targets were distorted by one-time factors such as the fines and compensation bill, but core costs rose 2% and HSBC spent an extra $500m strengthening its compliance operations. As a result, even the underlying cost-income ratio was 56.2% in 2012, according to Credit Suisse estimates. At the same time, underlying revenue growth was disappointing at 7%, much of it driven by the investment-banking and corporate-banking divisions. The 18% rise in underlying pretax profit was largely driven by a $3.8bn drop in impairment charges, the bulk of this in the US.

Even so, Gulliver is confident he can identify opportunities to deploy surplus capital so the dividend payout ratio is likely to remain within the 40% to 60% target range. Capital freed by the sale of 46 business units, including HSBC's 20% stake in Chinese insurance giant Ping An and its Panama subsidiary, has been recycled to China, Mexico and the UK. But with the shares already trading at 1.2 times book value, Gulliver needs to prove he can invest capital effectively if they are to rise any higher.